Element Solutions Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2022. Element Solutions is a global specialty chemicals company serving electronics, industrial surface finishing, packaging and offshore energy markets. Amounts are in U.S. dollars; financial amounts are in millions unless noted.
Key financial results
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Net sales | $618.5 | $616.2 | $1,975.6 | $1,752.9 |
| Gross profit / margin | $221.9 / 35.9% | $244.5 / 39.7% | $734.7 / 37.2% | $724.0 / 41.3% |
| Operating profit / margin | $79.2 / 12.8% | $68.5 / 11.1% | $265.2 / 13.4% | $239.4 / 13.7% |
| Net income attributable to common stockholders | $53.2 | $36.0 | $174.5 | $199.4 |
| Diluted EPS attributable to common stockholders | $0.22 | $0.15 | $0.71 | $0.80 |
| Adjusted EBITDA (non-GAAP) | $133.5 | $130.6 | $418.7 | $400.2 |
| Adjusted EBITDA margin (non-GAAP) | 21.6% | 21.2% | 21.2% | 22.8% |
Q3 reported sales were flat, but rose 9% at constant currency and 5% organically. Nine-month sales rose 13% reported, 20% at constant currency and 6% organically. Q3 net income from continuing operations was $53.3 million versus $35.9 million a year earlier. Nine-month continuing-operations income declined to $173.3 million from $197.3 million, mainly against a prior-year tax benefit.
Segments and material period changes
- Electronics: Q3 sales were $387.7 million, down 6% reported but up 5% organically. Segment Adjusted EBITDA was $91.2 million, down 5% reported and up 2% at constant currency. Weaker China and Korea demand, memory-disk softness, lower high-margin customer volumes, metals pricing and higher input and logistics costs weighed on results.
- Industrial & Specialty: Q3 sales were $230.8 million, up 13% reported and 6% organically; Adjusted EBITDA was $42.3 million, up 22% reported. Acquisitions contributed materially to reported growth. Organic performance reflected pricing and energy activity, offset in part by softer construction and industrial markets and lower automotive production.
- Q3 gross margin fell 380 basis points year over year to 35.9%; nine-month gross margin fell 410 basis points to 37.2%. Cost inflation, logistics, product mix and metals-related effects pressured margins.
- Q3 operating profit increased 16% reported despite lower gross profit, supported by lower operating expenses, including reduced incentive compensation and the absence of a prior-year stock-compensation adjustment.
- The company completed the HSO acquisition in January 2022 for approximately $23 million net of cash. Coventya and HSO acquisitions supported Industrial & Specialty sales and earnings; prior-year comparisons also reflect the Coventya and HKW acquisitions.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $195.4 million, compared with $204.7 million. Capital expenditures were $32.8 million; cash used in investing activities was $61.9 million, versus $550.2 million, which included major acquisitions in 2021.
- Cash was $234.0 million at September 30, 2022, down from $330.1 million at year-end 2021. The company reported $1.90 billion of debt and $346 million of availability under its revolving credit facility and other lines, net of letters of credit. It was in compliance with debt covenants.
- Nine-month financing cash outflows included $113.5 million of share repurchases and $59.2 million of dividends. The remaining repurchase authorization was approximately $616 million at quarter-end.
- Management said cash, operating cash generation and available credit were expected to cover working capital, interest, capital expenditure and other requirements for at least the next 12 months. The first significant term-loan principal payment, approximately $1.08 billion, is due in 2026. The filing provides no specific earnings or sales guidance.
Outlook, risks and unusual items
- Management cited ongoing inflation and raw-material and logistics costs, foreign-exchange volatility, demand weakness in parts of electronics and industrial markets, and customer inventory or replacement-cycle effects. Memory-disk softness was expected to continue through year-end.
- The Russia-Ukraine conflict and related sanctions could worsen global supply-chain disruption and increase costs; the company said neither country represented a material portion of its business and it had no physical assets there. COVID-19 effects remain uncertain.
- Approximately 75% of nine-month sales were generated outside the U.S.; $206 million of quarter-end cash was held by foreign subsidiaries. Repatriation could result in additional taxes.
- Environmental liabilities were accrued at $13.9 million. The company did not anticipate material losses beyond recorded amounts, but said it could not estimate a reasonably possible excess-loss range. It stated that other legal matters were not expected to have a material adverse effect.
- Nine-month 2021 income tax expense included a non-recurring $55.2 million benefit from releases of valuation allowances; the benefit did not recur in 2022. Q3 2022 results also included $3.1 million of net gains on metals derivatives.
Important facts for investors to verify
- Whether organic demand and pricing can offset currency translation, softer end markets and ongoing cost pressures.
- How margins evolve as metals prices, inventory costs, logistics expense and product mix change.
- The contribution and integration progress of Coventya and HSO, and the performance of the acquired businesses absent acquisition effects.
- Cash generation, working-capital needs, shareholder returns and the company’s ability to manage approximately $1.90 billion of debt.
- The outcome and potential cost of environmental matters, and any material changes in geopolitical, supply-chain or foreign-exchange risks.